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A One Sided Market

With this post I will discuss the various risks facing this robo market in the hours before the March FOMC decision.

For the purposes of this post I will be using this week's discussion with SpotGamma because I think that it reflects the attitudes of most traders. This is an interesting interview, but I have to admit that my interest waned at about the 1/3rd mark when they started to rationalize away all risks in the "honey badger" market. Personally, I remain convinced that this is the most lethal market in history, therefore it's hard to listen to casual commentary dismissing all risk as "balanced".

As anyone could discern from this commentary, this is a one sided market:

The interview starts off by noting that there is a huge options hangover this week due to RECORD call option momentum chasing. Later in the interview, it's also noted that today (Wednesday) is VIX OPEX and that usually big moves in the VIX happen after the VIX OPEX which happens to coincide with FOMC. The SpotGamma (Kochuba) viewpoint on single stock momentum is that the magnitude of call expiration we saw last Friday should be a headwind for stocks post-OPEX i.e. this week. As further proof, they discuss the Nvidia event aka. "AI Woodstock" on Monday which had a very muted after effect for semiconductor stocks.

All of this can be viewed graphically via the largest relative call option exposure in market history:

The next topic they discuss is today's FOMC which is deemed largely a non-event on the belief that both monetary and fiscal policy are accommodative in 2024. I think that's very far from the truth. We don't know what Powell will say today but suffice to say this entire melt-up from last October was predicated upon rate cuts by March. Markets see a 0% chance of a rate cut today. Today we get the Fed's infamous "Dot plot" which allows individual Fed members to document their views on the Fed rate going into the future. Some pundits are going so far to say that there may be NO rate cuts in 2024 versus the seven rate cuts the market was pricing in January of this year. A hawkish Fed would follow a hawkish BOJ on Tuesday.

I want to also discuss this unquestioned assertion that fiscal policy is "accommodative" in 2024. Granted the deficit is enormous, no question about it. However, one could argue that the fiscal multiplier has collapsed given that a 6% of GDP deficit is yielding only 2% "growth". The only thing actually growing is the debt at 3x the rate of GDP. At any other time in U.S. history that would have been considered deep recession. In addition, we have this every six weeks government shutdown brinkmanship taking place for the past year. This is likely to continue all the way up to the election and then even possibly after the election. This amount of political dysfunction is a warning to markets of what would happen if we get a deleveraging event.

Absolutely nothing.

The interview gets even more bullish past the ~1/3rd mark with the equating of this bubble to the 2021 pandemic bubble which lasted almost the entire year. However, the timing of this melt-up in no way aligns with the 2020/2021 rally so I'm not sure how this supernova rally is "owed" an entire year. Another assertion that's made is that stock market returns continue higher AFTER Bitcoin makes large runs, which is totally untrue, in 2021 the Nasdaq and Bitcoin peaked at the exact same time.

At around the 16 minute mark of the interview it's noted that stocks ARE crashing - Up. Therefore performance chasing is the order of the day for underperforming hedge funds, whether via leveraged ETFs, 0 dated options, and/or put selling. And then the takeaway:

"That cycle doesn't stop on its own, so you go with the flow"

"Momentum rules the day. At least until it doesn't"

As I noted on Twitter late on Tuesday, the AI trade and the Bitcoin trade have both given up all gains for the month, despite record call option volumes.

What "event" ended the melt-up cycle?

The March jobs report.

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